Learn the intricacies and risks of FTHBI before buying in

The Liberal government’s First-Time Home Buyer Incentive (FTHBI) has been in effect since Sept. 2, enough time for real estate professionals to evaluate it and offer their thoughts.

FTHBI is an equity sharing incentive wherein the Canada Mortgage and Housing Corporation loans first-time home buyers a five or 10 percent downpayment on the purchase of a home. It’s five percent for an existing home and 10 percent for a new build.

The loan is interest free, but must be paid back when the home is sold or within 25 years, whichever comes first. But the payback could be more or less than the original loan, because the government is going to take five or 10 percent of the selling price.

“If you receive a five percent incentive of the home’s purchase price of $200,000, the incentive is $10,000. If your home value increases to $300,000, your payback would be five percent of the current value or $15,000,” says Jesse Davies, team lead at Jesse Davies and Associates, Re/Max House of Real Estate. “Conversely, if you receive a 10 percent incentive of the home’s purchase price of $200,000, or $20,000 and your home value decreases to $150,000, your repayment value will be 10 percent of that value, or $15,000.”

There are other stipulations and paperwork, says Davies.

“Calgary’s Walsh Law recently reviewed the program and determined some conclusions in terms of how buyers will be affected by the program,” he says.

The conclusions from Walsh Law are:

The approval process will take longer than for a standard mortgage loan, and sellers may not accommodate the longer condition time. The usual condition time is between 7 and 10 days.

Potential higher legal and appraisal costs due to two separate mortgages will need to be prepared, one for the lender and one for the equity share.

The government will not subsidize any renovation costs to improve and increase property value.

Refinance may be difficult in the future (it is not clear whether the government will permit refinancing of the first mortgage).

Non-permanent residents who are approved under this program may have difficulty in selling when their work permit expires as there is not enough equity built up.

The FTHBI has its risks, says Gareth Hughes, an AlbertaRE team member at CIR Realty.

“Take the following scenario as an example,” says Hughes. “Ben buys his first home in the Beltline for $300,000. He has $15,000 for his five percent downpayment and decides to take advantage of the FTHBI and gets an additional five percent from the Government of Canada for a total of $30,000. Based on an interest rate of 2.74 percent on a five-year fixed-term with a 25-year amortization, his monthly payment is $1,280.52 versus the $1,363.46 that it would have been without the incentive. A difference of $82.94 per month.

“A year later Ben loses his job and is forced to sell his apartment. The benchmark price for an apartment in the Beltline has dropped by 9.2 percent in that 12-month period, putting his resale value at approximately $272,500. The principal left owing on his mortgage is $270,490, barely less than the estimated resale value. However, once the property is sold he will have to pay back the five percent incentive, which is now $13,500 due to the decreased property value, a payout penalty of approximately $7,000 to get out of the mortgage, and legal fees of about $1,000. If he chooses to hire a realtor to assist him in the sale he will pay anywhere from $6,000 to $13,000 for that service, leaving him with a minimum shortfall of approximately $34,490. All of this for a reduced monthly payment of $83.”

And this, from Ling Lem, a mortgage associate at Jayman Financial.

“The incentive plus your downpayment cannot be equal to or greater than 20 percent because they want you to still pay the default insurance,” says Lem. “The maximum amount of downpayment from the buyer is 9.99 percent if they are getting 10 percent from the government.”

A small percentage of buyers have used the program at Mortgage Alliance, says broker Mark Herman.

“Of the few lenders we have had conversations with on this program, one lender says it is one percent of their business,” says Herman. “Their first request to use the program was our file and it was sent to them on September 20th. Other lenders say they are seeing the same response rate.”

The shared equity is a major barrier for James Laird, president of CanWise Financial and Co-Founder of Ratehub Inc.

“Those who remain in their home for the full 25-year period can expect the government to knock on their door and tell them that they owe two to three times the initial incentive,” says Laird. “These will be people nearing retirement age, and close to paying off their mortgage, but the government’s ownership stake in their house will remain.”

The government’s share of equity from the sale of the first home could limit the ability of those wanting to buy another home to afford that home, adds Laird.

The bottom line here is, there are two bottom lines.

1: If you want to reduce your monthly payment, go through the red tape and share the equity in your new home with the government, FTHBI works for you.

2: Be absolutely sure your new home salesperson, realtor and lender are well-versed in the intricacies of the program.

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